Turkey: Turkish Court Of Appeals: The Arbitral Tribunal's Failure To Obtain An Expert Report Does Not Constitute A Violation Of Public Policy

An arbitration-friendly decision was rendered by the 11th
Civil Chamber of the Turkish Court of Appeals
("CourtofAppeals") on 22 June 2016 [File no.
2016/4931, Decision no. 2016/6886]. The decision deals with the
question as to whether the arbitral tribunal's failure to
refer the calculation of damages to experts constitutes a
violation of public policy. Success in an arbitration
proceeding depends highly on the evidence that impacts the
substance of an arbitral award. Historically, public policy has
been and still is a delicate notion in Turkey. The Court of
Appeals' recent decision is particularly important, as the
Court of Appeals examined the discretionary power of the
arbitral tribunal to take evidence in respect of the
public policy ground for setting aside the award.

Article 439 of the Turkish Code of Civil Procedure
("CCP") stipulates the grounds for
setting aside a national arbitral award, which are in
line with the UNCITRAL Model Law. According to this
article, the award may be set aside upon one of the parties'
request if,

a party to the arbitration agreement was under some incapacity
or the said agreement is not valid under the law to which the
parties have subjected it or failing any indication regarding
the law applicable, the arbitration agreement is invalid under
Turkish law;

the composition of the arbitral tribunal is not in line with
the parties' agreement or with the procedure provided in the
CCP;

the arbitral award was not rendered within the term of
arbitration;

the arbitrator or arbitral tribunal unlawfully found
itself competent or incompetent;

the arbitrator or arbitral tribunal decided on a matter beyond
the scope of the arbitration agreement or did not decide on
all of the matters claimed or exceeded its
competence;

the arbitral proceedings were not conducted in accordance with
the parties' agreement or failing such agreement, with the CP,
and such non-compliance affected the substance of the
award; and

the parties were not treated with equality or were otherwise
unable to present their case. The award may be set aside ex officio
by the court examining the file if, (i) the subject matter of the
dispute is not capable of resolution by
arbitration under Turkish law, or (ii) the award is
in conflict with public policy.

As the grounds listed in Article 439 of the CCP are
exhaustive and awards are not subject to judicial review on their
merits, violation of public policy is the most preferred ground in
Turkey for making an application to set aside
an arbitral award.

In the present case, although the arbitrators were not experts
in the field of accounting and finance, they rendered an award
without obtaining an expert report regarding the calculation
of damages arising out of unjust termination of an agreement. The
plaintiff, invoking Article 431 of the CCP, which provides an
arbitral tribunal with the authority to decide to refer issues to
experts when necessary, filed a claim to set aside the award before
the competent first instance court, claiming that the award
violated public policy and the CCP's provisions. The first
instance court decided to set aside the award based on violations
of public policy and the CCP provisions. According to the first
instance court, as per Article 431 of the CCP, the arbitral
tribunal should have referred the calculation of damages to
experts, and obtaining an expert report regarding the calculation
of damages is a matter relating to public policy.
However, the Court of Appeals reversed the first instance
court's decision by adopting an arbitration-friendly
approach and emphasizing the fundamental principles of commercial
arbitration.

Firstly, the Court of Appeals held that the application of
applicable law is not listed as one of the grounds for setting
aside an award under Article 431 of the CCP, and therefore this
matter cannot be examined during an action for setting aside. This
conclusion complies with the standards of arbitration-friendly
jurisdictions, where it is well established that an arbitral
tribunal does not exceed its authority merely because it reaches an
incorrect substantive result as regards the application of law.
Doing so is not an excess of mandate or authority, and is not
contrary to public policy, but a substantive mistake on an issue
within the tribunal's jurisdiction. The English High Court held
in a recent decision that the tribunal's failure to reach the
correct decision cannot constitute a ground for challenge under the
English Arbitration Act [B v. A [2010] 2
Lloyd's Rep 681, [2010] EWHC 1626 (QB) (Comm)]. A recent U.S.
decision is to the same effect, holding that courts are limited to
determining whether the arbitrator acted within the scope of his
powers and not whether he did it well, correctly or reasonably
[AmerixCorp v. Jones, 457 F. Appx. 287, 291 (US Ct of Apps (4th
Cir), 2011)].

Secondly, the Court of Appeals held that the arbitral tribunal
had discretionary power to obtain an expert report and the
arbitral tribunal's failure to refer the calculation of
damages to experts does not constitute a violation of public
policy. It seems plausible to suggest that this conclusion is
consistent with the wording of Article 431 of the CCP, as it
stipulates that the arbitral tribunal "may" decide to
appoint experts to report on issues determined by the tribunal. In
other words, pursuant to Article 431 of the CCP, arbitrators are
competent but they have discretion to request or exclude expert
evidence. This conclusion is also in line with the provisions of
the IBA Rules on Taking of Evidence
in International Arbitration. Under Article 9 of the IBA
Rules on Taking of Evidence in International Arbitration, the
arbitral tribunal may exclude any evidence due to lack of
sufficient relevance to the case or materiality to its outcome.

Furthermore, the conclusion reached by the Court of Appeals,
according to which arbitral tribunals possess broad authority over
evidentiary matters, is reflected in national arbitration
legislation and judicial decisions of arbitration-friendly
jurisdictions. For instance, according to section 34(1) of the
English Arbitration Act, an arbitral tribunal shall
decide all procedural and evidentiary matters, subject to the
right of the parties to agree any matter. Similarly, courts
generally refuse to set aside particular awards based
on allegedly incorrect refusals to admit or exclude evidence.
In this respect, the French Court of Appeals upheld an award which
refused to consider evidence provided by one party, reasoning that
arbitral tribunals' evidentiary decisions cannot
ordinarily be reviewed [Judgment of Paris Court of Appeals, 2001
Rev. Arb. 731, 16 November 2000].

In conclusion, the Court of Appeals' decision is pleasing,
as it emphasizes essential principles that have already been
accepted in arbitration-friendly jurisdictions. One issue worth
noting is that this Court of Appeals decision concerns an award
rendered in domestic arbitration, so arbitration lawyers have good
reason to hope that the same approach will be adopted in relation
to awards rendered in international arbitration proceedings. It is
expected that the Court of Appeals' arbitration-friendly
interpretation will positively influence the public policy
understanding of Turkish courts in national and
international arbitration practice.

Purchasers of distressed debt have inevitably found themselves involved in legal disputes with borrowers seeking to undermine the loan purchaser's position as secured lender or at least put it on full proof of its entitlements.

On 26 April 2016, the Stockholm Chamber of Commerce ("SCC") released its draft Arbitration Rules 2017 which propose the introduction or development of provisions relating to multi-party and multi-contract disputes.

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